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Employment Contracts - The Doctrine of Frustration

November 30, 2021

Ontario

,

Canada

Issue

When can an employer terminate an employee on long term disability?

Conclusion

Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes a thing radically different from that which was undertaken by the contract. The doctrine of frustration is applicable to employment contracts in cases where an employee is unable to work because of a disabling illness. The question to be asked is: was the employee's incapacity, looked at before the purported dismissal, of such a nature, or did it appear likely to continue for such a period, that further performance of his obligations in the future would either be impossible or would be a thing radically different from that undertaken by him and agreed to be accepted by the employer under the agreed terms of his employment? (Ciszkowski v. Canac Kitchens; Duong v. Linamar Corporation)

Relevant considerations in finding frustration of an employment contract include: the terms of the contract; how long the employment was likely to last in the absence of illness; the nature of the employment; the nature of the illness or injury and how long it has lasted and the prospects of recovery and the period of past employment. These matters may not be exhaustive and any one matter is not necessarily determinative. Each case must be decided on its own facts and circumstances. (Duong v. Linamar Corporation)

An employee’s disability and its effect on frustration must be assessed at the time of dismissal. (Ciszkowski v. Canac Kitchens)

The presence of long-term sick leave and disability benefits in an employment contract may indicate a greater tolerance for the duration of an employee's absence before frustration occurs. (Ciszkowski v. Canac Kitchens)

However, the mere fact that there is long term disability coverage made available to an employee does not mean that the employer agreed to employ someone with long term disability indefinitely in spite of the employee’s inability to work. The fact that there is an LTD policy available as part of the employment terms does not necessarily mean the employer cannot rely on frustration. (Duong v. Linamar Corporation)

In Wightman Estate v. 2774046 Canada Inc., the employee contended that since the contract had a long-term disability insurance clause it could not be frustrated by his illness. The Court of Appeal disagreed. Although the contract anticipated absence due to disability and provided for LTD insurance, it did not state that the contract would continue indefinitely despite his condition. The contract specifically contemplated the end of employment as a result of illness.

In Burgess v. Central Trust Company, the employee was injured and unable to work following a motor vehicle accident. After two months, the employer advised her that her position as assistant lending officer had been filled, but that it would have a teller position available for her, at the same salary, when she was ready to return to work. The employee claimed that she had been constructively dismissed. The Court found that the employer acted reasonably in filling the employee's position, which was key to the business, especially in the upcoming tax season. As the employee was unable to meet the reasonable needs of the employer, the employment contract was frustrated.

Law

In Duong v. Linamar Corporation, 2010 ONSC 3159 (CanLII), the plaintiff worked as a machine operator. He suffered from a history of back pain, and, eventually, he sustained an injury while bending over to reach for parts in November 2006. He received immediate first aid attention for his injury. He was unable to return to work immediately following the injury. It was agreed with his physician that he would commence modified duties with reduced hours, and would gradually return to full hours. Over the next weeks, attempts were made to return him to work, however, the plaintiff complained of pain and refused modified duties. The doctor advised the employer that the worker would be fit for full-time employment after 2-3 weeks, but that he should not work before that. He was entitled to participate in the group benefits plan, including LTD coverage which was available if an employee became "totally disabled". The employer received reports for a couple of years, at least monthly, and usually more often, stating that there had been no significant improvement in the worker's condition. Eventually, in February 2009, he was terminated due to frustration of contract. The Court found that the employer was entitled to terminate the contract when it did due to frustration:

[33] Frustration of a contract occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. See Davis Contractors Ltd. v. Fareham Urban District Council, [1956] A.C. 696 at 728, per Lord Radcliffe.

[34] More recently, Binnie J. in Naylor Group Inc. v. Ellis-Don Construction Ltd. affirmed this test for frustration. He stated:

53 Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract”: Peter Kiewit Sons’ Co. v. Eakins Construction Ltd., 1960 CanLII 37 (SCC), [1960] S.C.R. 361, per Judson J., at p. 368, quoting Davis Contractors Ltd. v. Fareham Urban District Council, [1956] A.C. 696 (H.L.), at p. 729.

54 Earlier cases of “frustration” proceeded on an “implied term” theory. The court was to ask itself a hypothetical question: if the contracting parties, as reasonable people, had contemplated the supervening event at the time of contracting, would they have agreed that it would put the contract to an end? The implied term theory is now largely rejected because of its reliance on fiction and imputation.

55 More recent case law, including Peter Kiewit, adopts a more candid approach. The court is asked to intervene, not to enforce some fictional intention imputed to the parties, but to relieve the parties of their bargain because a supervening event (the OLRB decision) has occurred without the fault of either party. For instance, in the present case, the supervening event would have had to alter the nature of the appellant’s obligation to contract with the respondent to such an extent that to compel performance despite the new and changed circumstances would be to order the appellant to do something radically different from what the parties agreed to under the tendering contract: [Citations omitted].

[35] The doctrine of frustration is applicable to employment contracts in cases where an employee is unable to work because of a disabling illness. See Dartmouth Ferry Commission v. Marks (1904), 1904 CanLII 61 (SCC), 34 S.C.R. 366. In Marshall v. Harland & Wolff Ltd, [1972] 2 All E.R. 715 Sir John Donaldson of the N.I.R.C. said that the question to be asked is: was the employee's incapacity, looked at before the purported dismissal, of such a nature, or did it appear likely to continue for such a period, that further performance of his obligations in the future would either be impossible or would be a thing radically different from that undertaken by him and agreed to be accepted by the employer under the agreed terms of his employment? He then said that in considering the answer to this question matters to be taken into account should include the terms of the contract, how long the employment was likely to last in the absence of illness, the nature of the employment, the nature of the illness or injury and how long it has lasted and the prospects of recovery and the period of past employment. These matters are obviously useful considerations, although they may not be exhaustive and any one matter is not necessarily determinative. Each case must be decided on its own facts and circumstances.

[36] In Wightman Estate v. 2774046 Canada Inc. 2006 B.C.C.A. Smith J.A. for the court made clear that the longer an illness persists, the more likely that frustration has occurred. He stated:

43 This leads to the question whether the sickness in this case "put an end, in the business sense, to their business engagement". Sickness will not frustrate an employment contract when the employee appears likely to return to work, but the longer the sickness persists, the more likely the employment relationship has been destroyed: see Marshall… This important distinction between temporary and permanent disability was introduced into Canadian law in Dartmouth Ferry Commission v. Marks…

[37] In my view, the contract of employment was frustrated by the time Eston terminated the plaintiff’s employment on February 25, 2009. My reasons for coming to this conclusion are as follows.

[38] The plaintiff had not worked since October, 2005. The reports from his physician Dr. Sokol had said for some time that there had been no improvement to Mr. Duong’s condition. The last report was in September 2008 and although the plaintiff was asked if he had more medical information, none was provided.

[39] Although Odyssey had said in its letter of August 1, 2008 that with comprehensive behavioural treatment, there was a good likelihood (75%) he could increase his function and could resume many activities he had previously enjoyed, including employment, Co-operators terminated his LTD benefits at the end of September, 2008 based on the information from Odyssey that the plaintiff had not participated adequately in the Odyssey treatment program. Although Mr. Duong told Ms. Puim that Odyssey was wrong and that he was participating in a rehabilitation programme, he did not appeal the termination of his LTD benefits, even though Ms. Puim offered to assist him if he wanted. This failure to appeal is some indication in my view that the plaintiff knew he had not participated as required. It also supports Eston’s determination that there was no reasonable foreseeable date for Mr. Duong returning to work.

[40] Even if the plaintiff was participating in the rehabilitation programme, there was no evidence that was provided to Eston indicating that he had any prospect in the foreseeable future to returning to work. Nor has he provided any evidence on this motion that he has any prospect of returning to work. He pleads in his statement of claim that his illness and disability are of a continuous and ongoing nature and that as a result, he continues to be totally disabled. During argument Mr. Wright agreed that the effect of this pleading is that the plaintiff is permanently disabled. In his statement of claim against Co-operators, the plaintiff pleads that his prognosis for return to work is very poor and that his illness and disability are of a continuous and ongoing nature such that he is totally disabled.

[41] Mr. Wright contended that if an employee is permanently disabled, the fact that there was an LTD policy available as part of the employment terms means the employer cannot rely on frustration. I do not accept such a broad statement. In this case, the parties did not provide that the contractual relationship would continue in spite of permanent disability. The fact that there is long term disability coverage made available to the employees of Eston, and paid for by them, does not mean that Eston agreed to employ someone with long term disability indefinitely in spite of the employee’s inability to work. The policy itself contemplated LTD benefits after severance. It certainly did not provide that employment would continue throughout long term disability, nor could it as it was a policy between employees and Co-operators and Eston was not a party to it.

[42] This is not a situation such as in Nicholl v. Wray Brokers Ltd. [1999] O.J. No. 954 in which Cameron J. held that a shareholders’ agreement requiring consent before the employee could be terminated displaced the application of the common law of frustration. There was no agreement in this case displacing the concept of frustration. Nor is this a case such as Antonacci v. Great Atlantic & Pacific Co. of Canada 1998 CanLII 14734 (ON SC), [1998] O.J. No. 876, aff’d [2002] O.J. No. 40 in which Swinton J. held that the prognosis for the terminated employee was not total disability but rather that the employee would be able to return to employment in six to eight weeks. In this case, Mr. Duong had been deemed totally disabled for two and a half years by Co-operators when his benefits were terminated due to his failure to participate in rehabilitation, and he admits that he is still totally disabled.

[43] In my view to have required Eston to continue to employ Mr. Duong in all of the circumstances would, in the language of Lord Radcliffe adopted by Binnie J. in Naylor, have required Eston to do something radically different from that which was undertaken by the contract of employment. Eston was entitled to terminate the plaintiff’s employment when it did by reason of the frustration of his contract of employment.

In Ciszkowski v. Canac Kitchens, 2015 ONSC 73 (CanLII), the employee was diagnosed with depression and anxiety at around the time shortly after his termination. However, the Court did not find that the plaintiff's contract of employment was frustrated at the point of his termination, but rather that he was constructively dismissed due to changes to his position. It reviewed the jurisprudence to determine when an employee's disability could lead to frustration of an employment contract:

[144] Canac’s counsel relied on British Columbia and Ontario jurisprudence to establish that an employee’s disability can lead to frustration of the employment contract and can entitle the employer to terminate the employee without providing reasonable notice or pay in lieu thereof.

[145] In Demuynck v. Agentis Information Services Inc., 2003 BCSC 96, [2003] B.C.J. No. 113, the Court held that “a defendant employer may rely on any ‘just cause’ or frustration due to disability discovered up to the time of trial, but unknown at the time of termination”: Demuynck at para. 24. The Court came to the same conclusion in Trevitt v. Blanche Equipment Rentals Ltd., 2006 BCSC 94 at para. 37, [2006] B.C.J. No. 93.

[146] In Duong v. Linamar Corp., 2010 ONSC 3159, [2010] O.J. No. 2314 [Duong], the doctrine of frustration as it applied to employment contracts was canvassed. While citing Marshall v. Harland & Wolff Ltd., [1972] 2 All E.R. 715 (N.I.R.C.), the Court held that the question to be asked is: “was the employee’s incapacity, looked at before the purported dismissal, of such a nature, or did it appear likely to continue for such a period, that further performance of his obligations in the future would either be impossible or would be a thing radically different from that undertaken by him and agreed to be accepted by the employer under the agreed terms of his employment?”: Duong at para. 35.

[147] In Duong, at para. 41, the proposition that the existence of LTD benefits disentitled the employer from relying on frustration to put an end to the contract of employment was rejected:

Mr. Wright contended that if an employee is permanently disabled, the fact that there was an LTD policy available as part of the employment terms means the employer cannot rely on frustration. I do not accept such a broad statement. In this case, the parties did not provide that the contractual relationship would continue in spite of permanent disability. The fact that there is long term disability coverage made available to the employees of Eston, and paid for by them, does not mean that Eston agreed to employ someone with long term disability indefinitely in spite of the employee’s inability to work. The policy itself contemplated LTD benefits after severance. It certainly did not provide that employment would continue throughout long term disability, nor could it as it was a policy between employees and Co-operators and Eston was not a party to it.

[148] Finally, Mr. McKechnie relied on Fraser v. UBS Global Asset Management, 2011 ONSC 5448, [2011] O.J. No. 6167 [Fraser]. In that case, it was held that frustration, once established, terminated a contract by operation of law and that nothing more need be done: Fraser at para. 15. The Court held that an employer is entitled to rely on evidence disclosed subsequent to the termination to establish frustration of the employment contract at the time of termination: Fraser at para. 30.

[149] Mr. Fletcher relied on Dragone v. Riva Plumbing Ltd., [2007] O.J. No. 3710 (S.C.), 2007 CanLII 40543 [Dragone]. At paras. 22-25, the relationship between frustration of an employment contract and the existence of LTD benefits was addressed:

22 The presence of long-term sick leave and disability benefits indicates a greater tolerance for the duration of an employee's absence before frustration occurs. Indeed, it has been suggested that contracting for these benefits may postpone the time of frustration because it may be inferred that the contracting parties anticipated that the employee might take leave for illness. See: Antonacci v. Great Atlantic & Pacific Co. of Canada, 1998 CanLII 14734 (ON SC), [1998] O.J. No. 876 (Gen. Div.), affd. in part [2000] O.J. No. 280 (C.A.); E.E. Mole and M.J. Stendon, Wrongful Dismissal Handbook (3rd ed.) (Markham: LexisNexis Canada Ltd., 2004), chapter B-4.

23 In this regard, Geoff England, Employment Law in Canada (4th ed.) (Markham: LexisNexis Canada Ltd., loose leaf), at para. 18.22 states:

It is strongly arguable that if the employee is entitled to and is in receipt of long term disability benefits under his or her employment contract which covers his or her sickness or disability, the doctrine of frustration is inapplicable because the parties will have foreseen the alleged frustrating event and will have allocated its risk accordingly. Indeed, it would appear to fly in the face of the parties' factual intentions if the employer could release a sick or disabled employee and deprive him or her of those very benefits by arguing that the employment contract has been frustrated.

24 Riva Plumbing argued that enough time had passed that Ms. Dragone’s contract was frustrated, and Ms. Dragone’s counsel conceded that there might come a time when her contract of employment could be frustrated, but he argued that the time had not yet arrived. There was a debate during the argument about whether it would be appropriate for the Court to declare how long Ms. Dragone might have to return to work. However, upon reflection, I think that approach is neither possible nor appropriate.

25 At the present time, it cannot now be said that the contract of employment has been frustrated. Although there has been 14 months of absence from work, there is no evidence that Ms. Dragone’s protracted absence is harmful to the company and the presence of long-term disability insurance suggests, at least, that a much longer period than 14 months was anticipated before it could be said that frustration had occurred, and it is arguable that given the long-term disability arrangements, frustration may never occur. I conclude that in the circumstances of the immediate case that Ms. Dragone’s contract of employment has not yet been frustrated.

[150] Additionally, Plaintiff’s counsel relied on Altman, at para. 65, for the proposition that an employee’s disability and its effect on frustration must be assessed at the time of dismissal.

(3) Analysis

[151] I do not find that the Plaintiff’s contract of employment was frustrated at the time of his termination such that Canac was not obligated to provide anything more than the ESA minimums. In the first place, the Plaintiff was constructively dismissed and entitled to treat his employment as at an end upon his return to work in 2005. At that date, his employment contract was not frustrated. The doctrine of frustration is simply inapplicable as the Plaintiff continued to work for Canac following his constructive dismissal. His last day of work was January 11, 2006. He subsequently began to receive long term disability benefits from Manulife. Based upon my finding of constructive dismissal premised upon the diminution in his employment responsibilities as of April 2005, the doctrine of frustration is neither relevant nor applicable. That is my conclusion and ends this matter as far as I am concerned, but I will address Canac’s other arguments out of prudence.

In Burgess v. Central Trust Company, 1988 CanLII 7564 (NB QB), the employee, who had a history of absenteeism at work, was unable to work following a motor vehicle accident. After two months, the employer advised her that her position as assistant lending officer had been filled, but that it would have a teller position available for her when she was ready to return to work. The employee claimed that she had been constructively dismissed. The Court found that the employer acted reasonably in filling the employee's position, which was key to the business, especially in the upcoming tax season. As the employee was unable to meet these needs, the employment contract was frustrated:

54 In the legal text The Law of Dismissal in Canada by Levitt (1985), the author notes the following respecting illness at pp. 96-97:

One British decision found that the proper test in determining whether the illness is sufficiently long term to be cause for discharge is: to determine whether the absence was such that the employer could not be reasonably expected to await the employee's return any longer. Here, the employer had to replace the employee who was a key person in the operation. Accordingly his contract ended by frustration. The employee was incapacitated for almost two years during which time nothing was said to him and his medical certificates were accepted. When he was ready to return to work, he was told that there was no work for him. The British Review Tribunal held that the failure to dismiss, although a factor, was not conclusive and that his employment contract had been frustrated.

If an employee is engaged for a term or project, cause for discharge will exist of the illness prohibits performance for a significant part of that term. Similarly, if an employee cannot do his regular work, his employer is not required to provide him with other work which might be available.

55 In my view the evidence is clear that the plaintiff and defendant were engaged in a relatively long-term employee-employer relationship and that the position held by the plaintiff as at October 15, 1985, was a very responsible and key role in the defendant's business, particularly in the "RRSP - Tax" time in the spring of each year.

56 The evidence in my view is also clear that the plaintiff had established a significant absenteeism record prior to the October 1985 car accident. The defendant was never advised as to the reasons for these absences except only to receive generalized medical certificates.

57 I believe that in these circumstances it was most reasonable for Gordon and Taylor to meet and discuss this problem with the plaintiff on November 4, 1985, and as noted above I accept the version presented by Gordon and Taylor as to what transpired at that meeting.

58 From the day of the October 15, 1985, car accident, except for 3 days (October 31, November 1 and November 4, 1985), to August 1987 the plaintiff has consistently applied for and been paid and accepted short and long-term disability payments on the basis of her own statements to the disability insurer that she was disabled to the extent of being unable to report to work.

59 This evidence in my view contradicts the plaintiff's contention that she might have returned to work on March 3, 1986, had her assistant lending officer's position been kept open for her.

60 I further believe and find that the defendant acted reasonably in replacing the plaintiff's assistant lending officer's position effective January 10, 1986, because of the upcoming busy season and I do not believe that it can fairly be said that this action by the defendant was the cause of her emotional and/or physical or medical problems which continued to August 1987.

61 In all these circumstances I believe the employment contract between these parties became frustrated. The defendant had need of a person to fill a key role in a very busy time of the company's year and the plaintiff, because of her disability to work, whether grounded in emotionalism or physical injuries or a combination of both, was unable to meet the legitimate needs of the company.

62 This is not a case of a temporary illness but the combination of an unreasonably lengthy absence in a key employment position.

63 I therefore find that the contract of employment became frustrated due to this prolonged physical and emotional illness of the plaintiff.

In Wightman Estate v. 2774046 Canada Inc., 2006 BCCA 424 (CanLII), the British Columbia Court of Appeal surveyed the law on frustration of employment contract by the employee's illness. The Court noted that a contract should not be frustrated if it provided for the new circumstances. In that case, the employee contended that since the contract had a long-term disability insurance clause it could not be frustrated by his illness. The Court of Appeal disagreed. Although the contract anticipated absence due to disability and provided for LTD insurance, it did not state that the contract would continue indefinitely despite his condition. The contract specifically contemplated the end of employment as a result of illness:

[27] It follows that the court will not declare a contract frustrated if the parties have provided that the contract will apply in the new circumstances. For example, in Peter Kiewit Sons’ Co. v. Eakins Construction Ltd., supra, where a subcontractor on a bridge construction project argued that the requirement to do extra work frustrated the subcontract, Judson J. said, at 368,

On any view of the facts of this case, there cannot be frustration. The performance of extra work will not justify it, even if such work was done. Extra work of the kind said to have been performed in this case is a contingency covered by the express contract and does not afford a ground for its dissolution. If there was to be extra piledriving, the character and extent of the obligation to pay were fully covered in the contract.

To the same effect, see Naylor Group Inc. v. Ellis-Don Construction Ltd., supra, at ¶ 59.

[28] Accordingly, whether the parties contemplated the possibility of Mr. Wightman’s disabling sickness is not a relevant question. Rather, the critical question is whether they provided that the contract would remain on foot despite the sickness if it should occur. The proper approach therefore requires an examination of the contract in order to determine whether its terms are wide enough to accommodate Mr. Wightman’s permanent disability without termination. If not, the contract is at an end.

[...]

[31] Thus, the appellant contends, Mr. Wightman’s promise to provide his services to the Employer was qualified by their agreement that he would not be required to discharge that obligation during periods of time when he was entitled to receive disability benefits. Accordingly, his continuance on sick leave because of his total disability was not something radically different from what the parties agreed to in their contract.

[32] However, this provision cannot be interpreted in isolation from the other terms of the contract. Rather, it must be considered in the context of the contract as a whole.

[33] Although the contract provided that Mr. Wightman would be entitled to receive long-term disability benefits until he ceased to be disabled as defined in the plan, until he reached age sixty-five, or until his earlier death, it did not provide that the employment contract would continue indefinitely despite his disability. Rather, it envisaged that Mr. Wightman’s employment might come to an end in certain circumstances.

[34] First, although the group benefits plan provides rehabilitation plans and programs to facilitate the return to work of disabled employees, these provisions also contemplate that a disabled employee might not be able to return to work with the same employer. The policy defines “rehabilitation” as involving “a training strategy or work related activity that can be expected to facilitate your return to your own or another job”. It distinguishes between a “comprehensive rehabilitation program” and a “rehabilitation plan”. The goal of the first must be “to return to work in a different job that requires extensive or prolonged training or in a self-employed capacity” while the goal of the second must be “to return to work in the same job, in a modified job with the same employer, or in a different job that capitalizes on transferable skills”. As well, the plan provides that if the insurance “terminates at the end of a rehabilitation plan or program that requires you to change employers”, the employee may convert the group coverage to an individual disability income policy without proof of insurability.

[...]

[36] I digress to repeat that it is agreed that Mr. Wightman was entitled to continued disability benefits under the plan.

[37] Since the contract is silent as to the conditions upon which sickness would end the employment, it must be taken that the phrase “if your employment ends because of sickness” has the meaning given to it by the common law.

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